Metros Where Office Flight to Quality Has Been Strongest And Weakest

Trying to understand the office sector these days is difficult. Tenants aren’t sure what their ultimate business models in terms of where employees work will be. Therefore, they don’t know how much space they’ll need and want short-term leases to give them flexibility. Property owners and operators are understandably concerned that an important basis of their own businesses could disappear. Everything, other than the workers, are trying to figure out how to get employees to want a return to the office.

One of the theories has been a move to quality, in which companies look for upscale properties with amenities that people will find attractive. Except the quality theory isn’t so simple, according to Moody’s Analytics.

Back in March, the firm published a report saying that Class A office was no longer a safe haven. “For the first time in over a year, Class A urban office performance has hit the skids. Occupied stock, which had been growing steadily in central business districts, sharply declined to end 2022,” the report said. Even as Class B and C properties were doing worse, A occupancies have started to do worse.

“We still tend to agree that a ‘flight to quality’ is a real phenomenon, but the net leasing activity is beginning to turn south even within those higher quality, urban assets,” Moody’s continued. “This is consistent with recent news of defaults of class A properties in Los Angeles and other major cities around the US. We don’t want to sound overly alarmist, and express this feeling in the case study below, but this is another indication that the skies are turning rather cloudy and seas increasingly choppy for the sector. Our forecast is for the office vacancy rate to keep rising this year and into next, and unfortunately tempt the historic high of 19.3% last hit during the Savings and Loan Crisis.” After that, they expect vacancy rates to average more than 15% for the long term.

But like virtually anything in the world, there isn’t a simple rule that governs how things play out in reality. In a new report, Moody’s looked at the metro areas that showed either the greatest or least flight to quality by comparing occupancies of Class A properties on one side and Class B and C on the other.

The five metros with the largest differences between A and B/C were Charleston, SC; Greenville, SC; Nashville, TN; Atlanta, GA; and Charlotte, NC. The differences ran from A doing 14% better than B/C in Charlotte to a 22% difference in Charleston.

But in some metros, it was B and C that outpaced A, the top five being Albuquerque, NM; Columbia, SC; San Antonio, TX; Oklahoma City, OK; and Kansas City, MO. The last one had B and C 5% over A. For Albuquerque, the difference was 11%.